Cornelius Burgess v. FDIC , 871 F.3d 297 ( 2017 )

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 17-60579
United States Court of Appeals
Fifth Circuit
FILED
CORNELIUS CAMPBELL BURGESS, September 7, 2017
Lyle W. Cayce
Movant, Clerk
v.
FEDERAL DEPOSIT INSURANCE CORPORATION
Respondent.
Motion to Stay Order of Federal Deposit Insurance Corporation’s Board of
Directors Pending Final Decision on Petition for Review
Nos. FDIC-14-0307e; FDIC-14-0308k
Before JONES, CLEMENT, and OWEN, Circuit Judges.
PRISCILLA R. OWEN, Circuit Judge:
Cornelius Campbell Burgess, a director and former officer of Herring
Bank (Bank), was investigated by the Federal Deposit Insurance Corporation
(FDIC) for improper expense practices and misuse of bank property. An FDIC
Administrative Law Judge (ALJ) conducted a hearing and issued
recommended findings of fact and conclusions of law. The FDIC Board largely
adopted the ALJ’s recommendations and issued an order assessing a civil
penalty against Burgess and requiring his withdrawal from the banking
industry. Burgess sought review in this court and filed the instant motion to
stay the FDIC’s order while we consider his petition for review. He alleges,
among other things, that the ALJ is an inferior “Officer of the United States”
who holds his office in violation of the Appointments Clause. 1 For the following
reasons, we grant Burgess’s motion and stay the FDIC’s order pending
resolution of the merits of the petition or further order of this court.
I
A stay pending disposition of a petition for review of an agency action is
discretionary, “not a matter of right.” 2 To obtain a stay, Burgess must show:
“(1) a likelihood of success on the merits; (2) that irreparable harm would occur
if a stay is not granted; (3) that the potential harm to the movant outweighs
the harm to the opposing party if a stay is not granted; and (4) that granting
of the stay would serve the public interest.” 3 This standard requires a “strong
showing” that Burgess is likely to succeed on the merits of his petition for
review, 4 not a “mere possibility of relief.” 5
1 U.S. CONST. art. II, § 2, cl. 2.
2 Nken v. Holder, 556 U.S. 418, 433 (2009) (quoting Virginian Ry. Co. v. United States, 272 U.S. 658,
672 (1926)).
3 Ignacio v. INS, 955 F.2d 295, 299 (5th Cir. 1992) (per curiam).
4 Nken, 556 U.S. at 426 (quoting Hilton v. Braunskill, 481 U.S. 770, 776 (1987)).
5 Id. at 434 (internal quotation marks omitted).
2
II
The Appointments Clause of the United States Constitution divides
federal government personnel into three categories: principal Officers, inferior
Officers, and non-Officer employees. Principal Officers must be appointed by
the President with “the Advice and Consent of the Senate.” 6 Inferior Officers
may be appointed by “the President alone, . . . the Courts of Law, or . . . the
Heads of Departments.” 7 Non-Officer employees are “lesser functionaries” in
the government, and their appointment is not subject to this Clause. 8
A government worker is an “Officer of the United States” subject to the
Appointments Clause if he or she exercises “significant authority pursuant to
the laws of the United States.” 9 In Freytag v. Commissioner of Internal
Revenue, the Supreme Court applied this standard to hold that a Special Trial
Judge (STJ) in the United States Tax Court, an Article I court, was an inferior
Officer subject to the Clause. 10
Later, the D.C. Circuit in Landry v. FDIC 11 considered whether FDIC
ALJs are inferior Officers—the same issue Burgess raises here—and held that
they are not. 12 In its rationale, the court read Freytag as holding that a
government worker must have final decision-making authority to be
considered an Officer. 13 That court recently applied its Landry rule in
Raymond J. Lucia Companies, Inc. v. SEC 14 to hold that SEC ALJs are not
“inferior Officers” either. 15
6 Edm. Sel. Cas. v. United States, 520 U.S. 651, 659 (1997) (quoting U.S. CONST. art. II, § 2, cl. 2).
7 U.S. CONST. art. II, § 2, cl. 2.
8 See Freytag v. Comm’r of Internal Revenue, 501 U.S. 868, 880 (1991) (quoting Buckley v. Valeo, 424
U.S. 1, 126 n.162 (1976)).
9 Edmond, 520 U.S. at 662 (quoting Buckley, 424 U.S. at 126).
10 See 501 U.S. at 881-82.
11 204 F.3d 1125 (D.C. Cir. 2000).
12 See id. at 1132-34.
13 See id. at 1134.
14 832 F.3d 277 (D.C. Cir. 2016).
15 See id. at 285-89.
3
While en banc review of Lucia was pending before the D.C. Circuit, the
Tenth Circuit, in Bandimere v. SEC, 16 rejected the D.C. Circuit’s
interpretation of Freytag. It held that (1) final decision-making authority is
not a necessary condition to Officer status; and (2) SEC ALJs are inferior
Officers. 17 The D.C. Circuit subsequently denied en banc review in Lucia by
an equally divided court, 18 and accordingly, a circuit split remains regarding
SEC ALJ’s. A petition for a writ of certiorari is now pending before the
Supreme Court in Lucia. 19
A
We conclude, based on the Supreme Court’s decision in Freytag, that
Burgess has made a “strong showing” that he is likely to succeed on the merits
of his petition for review. In Freytag, the Court considered an Appointments
Clause challenge to a proceeding in the United States Tax Court over which an
STJ appointed by the Chief Judge of the Tax Court had presided. 20 The
relevant statute authorized the STJ to decide certain cases, but in others, to
“hear the case and prepare proposed findings and an opinion,” without issuing
a decision. 21 Freytag’s proceeding was conducted under the latter provision,
and when the Tax Court ruled adversely to him after adopting the proposed
findings of the STJ, Freytag argued that the STJ was an inferior Officer within
the meaning of the Appointments Clause and had not been appointed in
accordance with its requirements. 22 Although the STJ lacked authority to
enter a final judgment in Freytag’s case, the Court agreed. 23 The Court based
16 844 F.3d 1168 (10th Cir. 2016).
17 See id. at 1181-85.
18 Raymond J. Lucia Cos., Inc. v. SEC, 2017 WL 2727019 (D.C. Cir. June 26, 2017) (en banc).
19 Petition for Writ of Certiorari, Raymond J. Lucia v. SEC (No. 17-130).
20 Freytag v. Comm’r of Internal Revenue, 501 U.S. 868, 871-73 (1991).
21 Id. at 873 (citing I.R.C. § 7443A(c)).
22 Id. at 877-78.
23 Id. at 881.
4
its holding on the “significance of the duties and discretion that special trial
judges possess.” 24 In reaching this conclusion, the Court noted that (1) the
position was “established by Law;” (2) its “duties, salary, and means of
appointment . . . are specified by statute;” and (3) the officeholder was
empowered to “exercise significant discretion” over “important functions.” 25
The Court then stated that “[e]ven if the duties of [STJs] . . . were not as
significant as we . . . have found them to be,” the “independent authority” that
STJs exercised when authorized to enter a final judgment in some cases
rendered them “inferior Officers” for all purposes. 26
The Court held that the STJs’ significant statutory duties and discretion
brought them within the Appointments Clause. The Court’s additional
statement—that these duties and discretion, coupled with the power to enter
final judgments also makes the STJs Officers—was dicta or an alternative
basis for its decision. We therefore conclude, contrary to the D.C. Circuit’s
decision in Landry, that final decision-making authority is not a necessary
condition for Officer status. 27
A government worker is therefore an “inferior Officer” subject to the
Appointments Clause if his office entails “significan[t] . . . duties and
discretion.” 28 To decide that issue, this court must consider: (1) whether the
office is “established by Law;” (2) whether the “duties, salary, and means of
appointment for that office are specified by statute;” 29 and (3) whether the
officeholder may “‘exercise significant discretion’ in ‘carrying out . . . important
functions.’” 30
24 Id.
25 Id. at 881-82.
26 Id. at 882.
27 See id. at 881-82; Bandimere v. SEC, 844 F.3d 1168, 1182-85 (10th Cir. 2016).
28 Id. at 881.
29 Id.
30 Bandimere, 844 F.3d at 1179 (quoting Freytag, 501 U.S. at 882).
5
B
The FDIC ALJ’s position is “established by Law” and its “duties, salary,
and means of appointment are specified by statute.” 31 In Freytag, the Court
held that the STJ post was established by law because a statute created the
office. 32 Here, the Administrative Procedure Act creates the ALJ position, 33
and it describes ALJ functions, 34 pay scale, 35 and applicable hiring practices. 36
FDIC ALJs also “carry[] out . . . important functions” over which they
“exercise significant discretion.” 37 The STJs in Freytag “[took] testimony,
conduct[ed] trials, rule[d] on the admissibility of evidence, and [had] the power
to enforce compliance with discovery orders.” 38 FDIC ALJs perform all of these
functions. 39 Moreover, their broad authority to preside over agency
adjudications and issue recommendations closely resembles the authority
wielded by United States Commissioners 40 —the forerunners of Magistrate
Judges—who the Supreme Court held were Officers. 41 Each of these functions
31 Freytag, 501 U.S. at 881.
32 See id. (contrasting STJs with special masters in Article III courts, “whose positions are not
established by law”).
33 See 5 U.S.C. § 556.
34 Id. § 556-557.
35 Id. § 5372.
36 Id. § 3105.
37 Freytag, 501 U.S. at 882.
38 Id. at 881-82.
39 See 12 C.F.R. § 308.5(b)(3) (“receive relevant evidence”); id. § 308.5(a) (“all powers necessary to
conduct a proceeding in a fair and impartial manner and to avoid unnecessary delay”); id.
§ 308.5(b)(3) (“rule upon the admission of evidence”); see also Landry v. FDIC, 204 F.3d 1125, 1141
(D.C. Cir. 2000) (Randolph, J., concurring) (“There are no relevant differences between the ALJ in
[Landry] and the special trial judge in Freytag.”). But see 12 C.F.R. § 308.26(c) (ALJ lacks power to
enforce subpoena against non-party, but may impose sanctions upon unresponsive subpoenaed non-
party).
40 Compare 12 C.F.R. § 308.5, with Go-Bart v. United States, 282 U.S. 344, 353 n.2 (1931) (listing
powers of United States Commissioners); see also Butz v. Economou, 438 U.S. 478, 513-15 (1978)
(holding that ALJs are entitled to absolute immunity from suit for damages stemming from official
acts because they are “functionally comparable” to judges).
41 Go-Bart, 282 U.S. at 352; see Rice v. Ames, 180 U.S. 371, 378 (1901); Landry, 204 F.3d at 1143
(Randolph, J., concurring); Pacemaker Diagnostic Clinic of Am., Inc. v. Instromedix, Inc., 725 F.2d
537, 545 (9th Cir. 1984) (en banc).
6
entails the exercise of discretion, 42 and they are “more than ministerial
tasks.” 43 There is nothing in the record to suggest that FDIC ALJs’ discretion
is curtailed sufficiently to distinguish it from that of the STJs in Freytag. The
duties of FDIC ALJs are therefore sufficiently “important,” and their discretion
sufficiently “significant,” to render them Officers under Freytag.
The FDIC ALJs’ lack of final decision-making authority does not defeat
Burgess’s assertion that they are inferior Officers. We recognize that the
Tenth Circuit in Bandimere noted a number of SEC ALJ responsibilities
pointing towards greater final decision-making authority than FDIC ALJs
possess in finding that SEC ALJs are constitutional Officers. 44 However, as
discussed above, our understanding of the Supreme Court’s decision in Freytag
is that the lack of final decision-making authority is not dispositive, and the
fact that the Tax Court STJ’s possessed that authority in some cases was not
outcome-determinative. 45
In the present case, the FDIC reviews ALJ recommendations de novo, 46
just as federal district courts review the reports of Magistrate Judges de novo
when a party takes exception. 47 But the Supreme Court concluded in Freytag
that the Tax Court’s standard of review of STJ determinations was “not
relevant.” 48
We are not persuaded that the FDIC’s power to “perform, direct the
performance of, or waive performance of” any ALJ duty renders the ALJs mere
42 See, e.g., 12 C.F.R. § 308.5(b)(7) (ALJ may decide non-dispositive motions).
43 Freytag, 501 U.S. at 881.
44 See Bandimere v. SEC, 844 F.3d 1168, 1180-81 (10th Cir. 2016) (noting SEC ALJs’ power to rule
on dispositive motions, the SEC’s deference to their credibility determinations, and the power to
enter initial decisions that could ripen to a final decision); see also id. at 1180 n.25 (“SEC ALJs
exercise significant authority in part because their initial decisions can and do become final without
plenary agency review.”).
45 See Freytag, 501 U.S. at 881-82; Bandimere, 844 F.3d at 1182-85.
46 See 12 C.F.R. § 308.40; Landry, 204 F.3d at 1133 (majority opinion).
47 28 U.S.C. § 636(b)(1).
48 Freytag, 501 U.S. at 874 n.3; see Landry, 204 F.3d at 1142 (Randolph, J., concurring).
7
employees. 49 As the Supreme Court stated in Edmond, inferior Officers’ work
is often “directed and supervised at some level” by a superior, 50 making this
issue more relevant to the distinction between principal and inferior Officers
than to the distinction between Officers and employees. 51 An FDIC ALJ has
the broad authority to admit or exclude evidence, permit discovery and shape
the course and scope of a contested hearing. Accordingly, the absence of final
decision-making authority does not sufficiently undermine FDIC ALJs’
“significant authority” 52 such that they are employees, rather than Officers.
III
Burgess must also show that irreparable harm would occur if a stay is
denied, that the potential harm to him if the stay is not granted outweighs any
harm to the FDIC if the stay were granted, and that granting a stay would
serve the public interest. 53 Burgess has made this showing.
“[A]n ‘injury is “irreparable” only if it cannot be undone through
monetary remedies.’” 54 Accordingly, reputational injury and lost wages do not
necessarily constitute irreparable harm. 55 Without an emergency stay,
Burgess must withdraw from the banking industry on September 8, 2017.
Burgess alleges that the reputational harm of the sanctions in addition to “the
concomitant destruction of his career in his chosen profession of banking,
constitutes irreparable injury.” 56 In Valley v. Rapides Parish School Board, 57
a decision pursuant to a constitutionally infirm hearing that injured
49 12 C.F.R. § 308.4.
50 Edm. Sel. Cas. v. United States, 520 U.S. 651, 663 (1997).
51 See id. at 665.
52 Id. at 662 (quoting Buckley v. Valeo, 424 U.S. 1, 126 (1976)).
53 Ignacio v. I.N.S., 955 F.2d 295, 299 (5th Cir. 1992) (per curiam); see also Winter v. Nat. Res. Def.
Council, Inc., 555 U.S. 7, 20 (2008); Vidal v. Gonzlaes, 491 F.3d 250, 254 n.17 (5th Cir. 2007).
54 Enter. Int’l, Inc. v. Corporacion Estatal Petrolera Ecuatoriana, 762 F.2d 464, 472 (5th Cir. 1985)
(quoting Deerfield Med. Ctr. v. City of Deerfield Beach, 661 F.2d 328, 338 (5th Cir. Unit B Nov. 1981).
55 See Sampson v. Murray, 415 U.S. 61, 89-92 (1974).
56 [Anonymous] v. FDIC, 617 F. Supp. 509, 516 (D.D.C. 1985).
57 118 F.3d 1047 (5th Cir. 1997).
8
petitioner’s “reputation and . . . ability to procure comparable employment”
was “sufficient to satisfy irreparable injury.” 58 Here, Burgess has established
a likelihood of success on the merits of his challenge to the constitutionality of
the FDIC’s adjudication and will be left unable to find employment in the
banking industry so long as the FDIC’s order remains in place. Burgess has
therefore established an irreparable injury.
For similar reasons, the balance of hardships favors issuing a stay.
Burgess faces personal harm, and the Bank, which values his ongoing
participation on the board, asserts that it faces harm as well. By contrast, the
FDIC does not allege any significant harm that would occur were a stay to
issue. The balance of hardships weighs in favor of issuing a stay.
Finally, we are not persuaded that the public interest would be adversely
affected by a stay pending a decision on the merits. Burgess points to the
supportive statements of Bank-affiliated witnesses and affiants asserting that
his continued participation on the board would benefit the Bank and its clients.
The FDIC counters that the misconduct findings at issue in this enforcement
action show “that it would not be in the public interest to allow [Burgess] to”
remain on the board. We do not find this argument persuasive because it is
undercut by other facts in the record and because the constitutionality of the
structure of the fact-finding procedure on which the FDIC relies lies at the
heart of this motion. The public interest therefore does not weigh against a
stay.
* * *
Because Burgess has established a likelihood of success on the merits of
his Appointments Clause challenge, that irreparable harm would result absent
58 Id. at 1056.
9
a stay, and that both the balance of hardships and the public interest favor a
stay, his motion for a stay is GRANTED.
10